Unit 2 Central bank and legal system KMC Bimesh Man Pati

Meaning and concept of central bank

Central bank is an independent national authority that conducts monetary policy, regulates banks
and provides financial services including economic research. Mostly central banks are established
by a statutory law and operated by a board of directors. The role of central bank was extended
from the economic crisis of 1930 by determining lending interest rate, increasing employment,
monetary stability, increasing economic rate.
Major role of central bank are, serving as a banker’s bank, having monopoly of note issue, acting
as a lender of last resort, regulating commercial banks, conducting monetary policy.

Principles of central bank

Principle of welfare of nation

Nepal rastra bank

Establishment of the Bank:

There shall be a Central Bank established in the name as NEPAL RASTRA BANK in order to carry
out the functions of Central Bank.

The Nepal Rastra Bank established under the Nepal Rastra Bank Act, 2012 (1955) shall be
deemed to have been established under this Act.

The Bank shall be an autonomous and corporate body with perpetual succession.

There shall be a separate seal for transaction of business of the Bank.

The Bank may, subject to this Act, acquire, utilize, retain, sell and otherwise dispose of or manage
movable and immovable property.

The Bank may sue in its name and the Bank may also be sued in the same name.

Objectives of the Bank:

The objectives of the Bank shall be as follows:-

To formulate necessary monetary and foreign exchange policies in order to maintain the
stability of price and balance of payment for sustainable development of economy, and
manage it;

To promote stability and liquidity required in banking and financial sector;

To develop a secure, healthy and efficient system of payment;

To regulate, inspect, supervise and monitor the banking and financial system; and
Unit 2 Central bank and legal system KMC Bimesh Man Pati
To promote entire banking and financial system of the Kingdom of Nepal and to enhance its public
credibility.

Functions, Duties and Powers of the Bank:

In order to achieve the objectives referred to, the functions, duties and powers of the Bank shall be
as follows:

To issue bank notes and coins;

To formulate necessary monetary policies in order to maintain price stability and to implement or
cause to implement them;

To formulate foreign exchange policies and to implement or cause to implement them;

To determine the system of foreign exchange rate;

To manage and operate foreign exchange reserve;

To issue license to commercial banks and financial institutions to carry on banking and financial
business and to regulate, inspect, supervise and monitor such transactions;

To act as a banker, advisor and financial agent of Government of Nepal;

To act as the banker of commercial banks and financial institutions and to function as the lender of
the last resort;

To establish and promote the system of payment, clearing and settlement and to regulate these
activities; and

To implement or cause to implement any other necessary functions which the Bank has to carry
out in order to achieve the objectives of the Bank under this Act;

Functions not to be Carried out by the Bank:

Except otherwise provided for in this Act, the Bank shall not carry out the following functions:-

Providing any loan, accepting any type of deposit or making any type of financial gift;

Purchasing shares of any commercial bank, financial institution, public corporation or a company or
acquiring any type of proprietary right in any financial, commercial, agricultural, industrial or
other institution;

Carrying out any type of business; and

Acquiring right over movable and immovable property by way of purchase, lease or in any manner
whatsoever. Provided that the Bank may acquire such property as required for carrying out
its function or for achieving its objectives.
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Notwithstanding anything contained in sub-section (1), the Bank may carry out the following
functions: -

To provide loan to and invest in the shares of the institutions which carry out the
functions helpful in carrying out the function of the Bank or in attaining its objectives, not
exceeding ten percent of the total capital of such institutions.

To provide loan to its own employees.

Relation between Government of Nepal and the Bank:

Any contact by Government of Nepal with the Bank and by the Bank with Government of Nepal
under this Act, shall be made through the Ministry of Finance.

Coordination with Public Bodies:

The Bank may, in order to achieve its objectives, make necessary coordination with public bodies
or their agencies or their organs.

The Bank shall, on the request made by Government of Nepal, provide necessary information on
the balance of payment, banking and financial matters.

Government of Nepal, public bodies and the private sector shall, in the event of request made by
the Bank, provide necessary information on economic and financial matters.

Privileges and Facilities to the Bank: Notwithstanding anything contained in the prevailing laws,
the Bank shall be entitled to the following privileges and facilities: -

Exemption from all types of taxes, fees and charges on the incomes, capital transactions, houses,
land, assets etc.;

No requirement for the payment of registration fee for registration of the deeds of loan or refinance
to be given by the Bank;

No requirement of revenue stamps on any of the documents relating to the Bank;

There would be no tax, fee, charge, duty on the export and import of bank notes, coins, gold, silver
and the paper, metal, chemicals, and other materials to be used for printing bank notes and minting
coins.

Formation of the Board: There shall be a Board of Directors in the Bank consisting of the
following members:-
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Governor - Chairman

Secretary, Ministry of Finance - Member

Two Deputy Governors - Member

Three Directors appointed by the Government of Nepal from amongst the persons renowned in the
fields of Economic, Monitory, Banking, Finance and Commercial Law - Member

Appointment of the Governor:

Government of Nepal, the Council of Ministers shall appoint Governor on the basis of the
recommendation of the Recommendation Committee formed.

Government of Nepal, the Council of Ministers shall, for the appointment of form a
Recommendation Committee as follows:-

Minister of Finance - Chairperson

One person from among the former governor - Member

One person designated by GOVN from among the person renowned in the field of economic,
banking , Finance and commercial law

Government of Nepal, the Council of Ministers shall, on the recommendation of the Governor,
appoint Deputy Governor.

Government of Nepal, the Council of Ministers shall appoint Directors.

Government of Nepal, the Council of Ministers shall, while appointing Directors, appoint them each
representing different sectors from amongst the persons renowned in economic, monetary,
banking, financial, commercial, management and commercial law sectors.

The term of office of the governor, deputy governor and directors if five years.

Qualifications of the Directors:

In order to be appointed to the post of Governor, Deputy Governor and Directors, a person shall
have to meet the following qualifications:-

A Nepalese citizen;

Having higher moral character;

Having work experience in economic, monetary, banking, financial and commercial law sectors
after having attained at least master's degree in economics, monetary, banking,
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finance, commerce, management, public administration, statistics, mathematics and
law.

Explanation:- For the purpose of this clause, "work experience" means the experience of works in
the post of special class of Government of Nepal or of the Bank or in the post of a
university Professor or in the post of Executive Chief of class 'A' of a commercial
bank or of a financial institution or in the equivalent post or in the post higher than
those in terms of the order of protocol.